US Oil Settles Above $101 as Egypt Takes Center Stage

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Wednesday, 3 Jul 2013 | 2:46 PM ETCNBC.com

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Oil prices powered higher for a third day Wednesday, with the New York contract hitting a 14-month high, as traders fretted about unrest in Egypt and reacted to rapidly tightening supplies in the U.S. domestic market.

Unrest in Egypt came to a head as President Mohamed Morsi rejected the army's ultimatum to step down amid widening protests against his government. Crude was bolstered as members of Morsi's party said they had lost contact with him, raising fears of a coup that could add to instability in the region. Morsi later stepped down in a military ouster.

While the Suez Canal Authority said there was no sign of the political turmoil disrupting up to 2.4 million barrels per day of oil transit, markets remained on edge given that Libya and Syria are also immersed in conflict.

"I'm putting my money on the military to take control of the Suez Canal and make sure pipeline asset is secure," said John Kilduff at Again Capital. The political turmoil in Cairo "was worth $5 a barrel [the premium for West Texas Intermediate]. I can see prices falling down back under $100 as the military takes control" and Morsi exists the stage, he added.

U.S. crude ended the session above $101, up more than $1.50 at its highest since September 2012, yet below session highs at $102.18. Brent rose by more than $1.70 to trade close to $106.

While U.S. crude pushed above $101 a barrel, for a weekly rally of nearly 5 percent, many traders were still fixated on ructions in key spreads trade, with the premium of European Brent crude over U.S. WTI touching its highest since 2010 before beginning to unwind amid an easing short squeeze.

U.S. weekly inventory data showing that stockpiles fell by more than 10 million barrels, the biggest drop for this time of year in nearly 13 years, added to earlier gains that had been fuelled by worries the unrest in Egypt could destabilize the Middle East, which pumps a third of the world's oil.

The sharp drawdown in crude stocks is "something that nobody anticipated," said Addison Armstrong, director of market research with Tradition Energy in Stamford, Conn. Although analysts have been looking for inventories to ebb, the drop was nearly five times as large as forecasts.

U.S. gasoline futures and heating oil futures rose to their highest levels in more than a week and were last trading at $2.85 per gallon and $2.96, respectively.

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Brent's premium to West Texas Intermediate crude at one point narrowed to $3.09, the weakest since December 2010, but widened to about $4.75 a barrel in afternoon trading.

Projects aimed at shifting crude to refineries on the Gulf Coast from the oversupplied hub of Cushing, Okla., are expected to lower transport costs and shrink the price gap between Brent and WTI.

The spread was largely a "momentum" trade, Armstrong said, as market fundamentals have not changed. Traders are likely to take bets off the table in the spread as well as straight oil trades later this week or early next week after this run higher.

A survey showed June growth in China's services sector at its weakest for nine months. That follows reports showing its manufacturing growth plumbed multimonth lows in June as foreign and domestic demand waned.

U.S. natural gas futures pared earlier losses but remained in negative territory at midday after government storage data showed a weekly inventory build in line with expectations.

Weekly data from the Energy Information Administration showed that total domestic inventories rose last week by 72 billion cubic feet, in line with Reuters poll estimates for a 71 bcf build and the five-year average build of 71 bcf for that week.

This week's report was released one day earlier than usual because of the U.S. July 4 Independence Day holiday Thursday.

Front-month August natural gas futures on the New York Mercantile Exchange were at $3.622 per million British thermal units, down 3.2 cents, or less than 1 percent. The contract was trading in the $3.585 area prior to the release of the data.